Expo 2020 and Dubai property boost for UAE banks

Bank earnings are set to rise on the improving Dubai economy and healthier balance sheets.

The improvement in the Dubai property sector has led to increased growth forecasts for UAE banks. Sarah Dea / The National
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UAE banks are forecast to report improved earnings for 2013 on the back of Dubai’s improving property sector as well as its Expo win last month.

The local investment bank Arqaam Capital said yesterday it had raised its growth forecast for banks’ earnings per share to 15.8 per cent for 2013, with further growth of 10.2 per cent forecast for next year.

The higher forecasts reflect both general economic recovery, in particular Dubai real estate, and efforts by banks to clean up balance sheets and diversify their asset mixes.

“Banks have made substantial provisioning efforts, new non-performing loans formation has slowed down and a pickup in business momentum has already started,” Arqaam said in its UAE bank sector report for this month.

As a result, Arqaam has increased its forecast for the growth in banks’ loan books to 10.1 per cent in 2013, up from 5.2 per cent last year.

Bank loans are forecast to grow by 9.8 per cent in 2014 and 9.7 per cent in 2015.

“UAE banks have cleaned up the previously troubled commercial real estate [CRE] segment and are turning their focus towards CRE lending with stronger cash flow coverage,” according to Arqaam.

“This will help keep credit losses in the CRE segment under control, especially following the recovery witnessed in the real estate market,” the bank’s report said.

Non-performing loans as a percentage of overall loan books are forecast to fall to 7.62 per cent this year from 8.07 in 2012, and are forecast to continue falling in 2014-15. Arqaam noted banks have gradually adopted a more conservative approach to provisioning for bank loans, a trend that is set to increase in the coming years.

On a cautionary note, Arqaam said: “We continue to be concerned about provisioning needs for [the debt of] Dubai Holding and Dubai World”.

Overall, Dubai’s victory in the race to host Expo 2020 will only bolster the UAE’s economy, according to Arqaam, with emirates other than Dubai sharing in the resulting economic largesse.

Arqaam forecasts the Expo award will add 0.5 percentage points to federal GDP in 2014 and 2015, rising to 2 percentage points in 2018.

There has been a strong recovery in the UAE non-oil economy based on trade, logistics and tourism, according to Moody’s annual credit report on the country. The report, published last Thursday, forecasts the UAE’s non-oil GDP growth will rise by 4.8 per cent next year.